N400bn Held By Firms With Weak Repayment Capacity … Nigeria’s NPLs Set To Rise Beyond 12%, Way Above Regulatory 5%

The World Bank has said that approximately 11 percent of corporate debt, over $400 billion is held by firms with weak repayment capacity in its latest report. In Nigeria, banking sector non performing loans is expected to rise beyond 12 per cent which is way above the five per cent regulatory ceiling.
The World Bank in its latest Global Financial Stability Report has said emerging economies need to take action in addressing rising loan defaults that could slow down growth and make them vulnerable to external developments.
The report said emerging economies should take advantage of supportive external conditions to proactively monitor and address corporate vulnerabilities, particularly those arising from excess leverage and foreign exchange exposures.
The World Bank report specifically stated that emerging economies need to take action in managing the impact of corporate distress, through swift and transparent recognition of nonperforming loans and strengthening insolvency frameworks.
The report also said emerging economies should ensure continued access to international financial services, including through strengthened regulatory and supervisory regimes that help lower risk perceptions, including those supporting correspondent banking activity.
It also advised boosting oversight and response capacity through reforms to macroprudential and supervisory frameworks. Noting that emerging markets are adapting to an environment of lower global growth, lower commodity prices, and reduced global trade, the report said the current favorable external environment, including low interest rates and the global search for investment opportunities, presents an opportunity for overly indebted firms to restructure their balance sheets.
“Corporate leverage in many of these markets may be peaking, since firms have slashed investment in the wake of commodity price declines and slowing demand. The challenge for many emerging market economies is to achieve a smooth deleveraging of weakened corporate balance sheets.
“Indebtedness declines only gradually under our baseline scenario, as high debt levels and excess capacity make it difficult to grow out of the problem, leaving them sensitive to downside external or domestic developments. A disorderly adjustment is still possible if global risk premiums rise and earnings fall. Such a scenario would exhaust bank capital buffers in some emerging markets.”
The report noted further that policies to further bolster the rights of outside investors, especially minority shareholders; bring disclosure requirements fully in line with international best practice; and promote greater board independence are likely to yield financial stability benefits.
“The analysis shows that stronger corporate governance and investor protection frameworks enhance the resilience of emerging market economies to global financial shocks—an issue of particular importance in the new phase the global financial system is entering. Corporate governance improvements enhance stock market efficiency and foster deeper and more liquid capital markets, allowing them to absorb shocks better. Emerging market economies with better corporate governance generally also have more resilient corporate balance sheets.”

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